Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Focus Financial Partners Inc. (NASDAQ:FOCS)? The smart money sentiment can provide an answer to this question.
Is FOCS a good stock to buy now? Prominent investors were in an optimistic mood. The number of long hedge fund bets inched up by 2 lately. Focus Financial Partners Inc. (NASDAQ:FOCS) was in 11 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 12. Our calculations also showed that FOCS isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Ian Wace of Marshall Wace
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let's take a look at the recent hedge fund action encompassing Focus Financial Partners Inc. (NASDAQ:FOCS).
Do Hedge Funds Think FOCS Is A Good Stock To Buy Now?
At the end of September, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 22% from the second quarter of 2020. By comparison, 11 hedge funds held shares or bullish call options in FOCS a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, George Soros's Soros Fund Management has the number one position in Focus Financial Partners Inc. (NASDAQ:FOCS), worth close to $19.2 million, comprising 0.5% of its total 13F portfolio. The second most bullish fund manager is Centerbridge Partners, managed by Mark T. Gallogly, which holds a $16.4 million position; the fund has 1.8% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions comprise Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Paul Marshall and Ian Wace's Marshall Wace LLP and Chuck Royce's Royce & Associates. In terms of the portfolio weights assigned to each position Centerbridge Partners allocated the biggest weight to Focus Financial Partners Inc. (NASDAQ:FOCS), around 1.84% of its 13F portfolio. Soros Fund Management is also relatively very bullish on the stock, designating 0.47 percent of its 13F equity portfolio to FOCS.
Now, key money managers have jumped into Focus Financial Partners Inc. (NASDAQ:FOCS) headfirst. AQR Capital Management, managed by Cliff Asness, initiated the largest position in Focus Financial Partners Inc. (NASDAQ:FOCS). AQR Capital Management had $0.6 million invested in the company at the end of the quarter. Mario Gabelli's GAMCO Investors also initiated a $0.4 million position during the quarter. The other funds with brand new FOCS positions are Benjamin A. Smith's Laurion Capital Management, Noam Gottesman's GLG Partners, and Matthew Hulsizer's PEAK6 Capital Management.
Let's now take a look at hedge fund activity in other stocks similar to Focus Financial Partners Inc. (NASDAQ:FOCS). These stocks are Apellis Pharmaceuticals, Inc. (NASDAQ:APLS), International Game Technology PLC (NYSE:IGT), MACOM Technology Solutions Holdings Inc (NASDAQ:MTSI), Ryder System, Inc. (NYSE:R), CNO Financial Group Inc (NYSE:CNO), Primo Water Corporation (NYSE:PRMW), and JELD-WEN Holding, Inc. (NYSE:JELD). This group of stocks' market valuations are closest to FOCS's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position APLS,29,515294,0 IGT,28,139844,5 MTSI,28,215078,5 R,19,232990,-1 CNO,19,293710,1 PRMW,26,638608,-5 JELD,24,209757,9 Average,24.7,320754,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.7 hedge funds with bullish positions and the average amount invested in these stocks was $321 million. That figure was $61 million in FOCS's case. Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) is the most popular stock in this table. On the other hand Ryder System, Inc. (NYSE:R) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Focus Financial Partners Inc. (NASDAQ:FOCS) is even less popular than R. Our overall hedge fund sentiment score for FOCS is 34.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Hedge funds clearly dropped the ball on FOCS as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on FOCS as the stock returned 37.3% since Q3 (through December 8th) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.